Sun Communities Inc (SUI) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sun Communities' second-quarter 2007 earnings results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

At this time, management would like to inform you that certain statements made during this conference call which are not historical facts may be deemed forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can provide no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ from expectations are detailed in this morning's press release and from time to time in the Company's periodic filings with the SEC. The Company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I'd like to introduce the management with us today -- Gary Shiffman, Chairman and Chief Executive Officer; Jeff Jorissen, Chief Financial Officer; and [Karen Dearing], Corporate Controller. Thank you. You may begin.

Thank you, operator, and good morning. Second quarter earnings as announced this morning were funds from operations of $13.7 million or $0.68 per share compared to $13.1 million or $0.65 per share in '06. For the first six months, funds from operations were $29.2 million or $1.44 per share compared to $27.8 million or $1.38 per share in the same period last year.

And as we return to our portfolio, we review that rental increases have been implemented in over 25,000 of our occupied sites in the first half of '07. The weighted average increase for those rental increases was 3.6% for the first half of the year. We have leased 95 net manufactured housing sites in the first half of '07. The Company's '07 budget, as we've discussed in prior calls, mirrors our '06 actual results of a net annual loss of over 500 sites.

The rental program has encountered weakness in leasing in the second half of the last three out of four years. And in fact, sites lost during the second half of '06 reversed the gains of the first half and resulted in an annual loss of over 500 sites, which set the budget for '07. The number of homes which we have rented in our portfolio stands at 5,026, an increase of about 166 sites in the second quarter. The monthly rent for the home and site averaged $708 at June 30, '07, an increase of about 6.5% from June 30, '06.

Lease rentals and rental home sales approximate 58% of lease expirations through the first six months. We have sold 191 rental homes in the first half of '07, achieving 104 sales in the second quarter alone. This compares to 80 sales in the first half of 2006. It's tracking to exceed our budgeted sales target of 320 for the year. We are very pleased with the job that Operations has been doing with regard to converting these rental homes into sales.

Repos are running approximately 30% below 2006 levels, continuing the trend which began in the second half of 2006. Accordingly, our purchases of repo homes through the rental program declined to 341 for the first half of 2007.

Our average monthly delinquency for the portfolio is running at levels similar to pre-2000. The number of repos in our portfolio at June 30 was about 233 which is lower than the average number of repos in 1999. Thus, both of these statistics have reverted to levels which existed prior to the challenging market conditions in our industry over the last six to seven years.

Our same site portfolio of 135 communities achieved a revenue and expense increase of 2.2% for the six months of '07. The result is 2.2% increase in NOI as well. Occupancy increased from 82.7% at the beginning of the year to 82.9% currently or at the end of second quarter. During the first half of this year we sold a total of 386 new and used homes -- and this includes the formal rental homes which we converted to sales -- as compared to 231 in the first half of 2006. Applications to rent homes or to buy homes have remained at levels well ahead of those in 2006 despite an increasing weakness in sales in the Florida market this year.

As we've discussed in some detail on prior calls, the recovery of the new home sales market really is the key to long-term prospects of the industry. While the sale and conversion of rental homes represents an improved economic return to the Company, it is really through the sale of new homes which we drive occupancy growth. And in that regard, we've implemented a new program which we call and will refer to as the Signature Home Program. We work directly with the home manufacturers to design new homes with features to stimulate demand and compete favorably against the site-built homes that are no longer available with the recent elimination of the subprime lending and subprime loans that made those homes, the site-built homes, available in prior years to our customers.

The new homes in the Signature Program highlight site-built style entrances, nine foot flat ceilings, drywall, a total dedication really to quality and distinguishing touches to differentiate these homes from the more traditional manufactured homes and to compare again very favorably to the type of site-built homes in the range of -- in the range [of] site-built housing, in the range of 170 to $200,000. So these signature homes range in size from about 1,400 to 1,800 square feet and the retail price that we're able to sell these for is about 55 to $69,000. They're initially priced with very low markups and the intention is basically to stimulate demand for this product, good word of mouth of the value that's being created, and of course to generate new revenue-producing sites in our community.

We were quite pleased that all four prototypes that we brought into Michigan as we worked through developing these homes sold in a very short period of time. Three of the four homes were with third party financing and one was internally financed by the Company. It is our expectation that we will roll out the Signature Home Program in approximately 20 communities over the next quarter.

At this time I think that I would open it up to any questions and Jeff, myself and Karen are available to discuss any Company responses. Operator, if you would open it up for questions?

(OPERATOR INSTRUCTIONS) Jonathan Litt, Citigroup.

This is Skyler calling in with Jon Litt. I just had a couple of questions, first of which was on your G&A. How do you feel about G&A trending for the full year?

We think the second quarter is a reasonable basis going forward. There's always the potential for perhaps a professional fee or something to increase but we think the second quarter is a pretty good run rate.

Could you also just give us some commentary on the current lending environment?

Lending environment with regard to the retail sales?

Yes.

I think that Origin released their earnings this morning. We were obviously pleased at the results there. They're ahead of budget approximately $2.8 million for the quarter, which I think indicates in their conference call and press release -- which I've only been able to read briefly -- that they are ahead of all aspects month by month for second quarter. And I think that at least one or perhaps two of the four homes that we sold in Michigan in our new Signature Program were actually financed by Origin. So I think the credit quality that our program is attracting is financeable by third party. If Origin is an indication of what's out there, and I know their credit standards are pretty tough, I think we might see additional sales financed by third parties as opposed to internally, as has been previously the case at Sun.

Paul Adornato, BMO Capital Markets.

I was wondering if you could comment on the credit quality and FICO scores of those that converted to homeownership in the quarter? Has it remained good?

I think that as we've said in the past, one of the things that Sun has done internally with their F&I department is the renters are underwritten as renters as if they were buyers at the time of their application to rent a home. They are then tracked for a period of six to 12 months based on their history of payment. And because of the increased benefit of economics that we receive by converting them, our sales department will look at anybody with a FICO of 640 or -- I think it's 635, actually, or better and a good payment history, and extend the ability for them to buy that home oftentimes at a rate that is cheaper than renting it. But the standard financing package is [9.95] interest rate with no more than a 15 year amortization. We think we've got a lot more control over that resident and their history as well as their future payment by having them in our community and having Sun Home Services working with our managers to make sure that they're current.

So, I think that we are not at the standard where all these people could be financed immediately by third parties or we would be doing that. But because of the shorter amortization period, the history, we feel that we're in at least a better economic position and no worse than as if we had to take this home back and put it back in the rental pool.

Okay. And if you were to look at the pool of kind of prequalified renters, that is, renters with that six to 12 month history and meeting all the rest of your standards, is that pool expected to grow going forward given that you've had the rental program for just a few years?

Well, if you're referring to the pool of qualified buyers?

Yes.

Yes, absolutely. I think that the first thing that happens, as I said, if they make six payments current and on-time they move right over to a tranche that moves into our telemarketing to design a program for them. If they hit 12 payments they're even in a better condition to be approved for credit. And you've got to remember that of each one of these pools there is a certain segment that are renters and they're only going to be renters. So a certain segment we capture and a certain we don't.

Right. And is it possible for you to break out those specific tranches, either now or maybe to follow up after the call?

Yes, I think that we can definitely have [John McLaren] discuss a little bit about those parameters with you. If you want to call him direct, that would be fine.

Sure. And moving on to the acquisition environment. Have you seen a change in community acquisitions given that the affordable residential portfolio just traded hands?

Yes, I think more important than that is what we've seen in the few acquisitions that we've been tracking and worked through is the turbulent dynamics of the debt market itself with spreads widening and tightening as the so-called flight to quality exists out there. So that in the acquisitions, how they're being underwritten by the lenders with regard to the turbulent market that's out there right now, I think that there is some flux. And there's a little bit of reluctance to trade at the types of cap rates, some of the properties, certainly the quality properties we're trading at. So I think we're standing back, as many people are, and looking at the pricing of some of the acquisitions and waiting till the dust settles. So, more of the current debt markets than it is our transaction.

Right. And would you describe it as an increase in cap rates at the high-end more so than at the low-end?

No, I would describe it as a standstill with regard to the unrealistic cap rates as they were in Florida breaking the 6% fixed cap rate barrier. It's just nobody is lending against that. And as far as I know right now nobody is making a move to buy those types of properties. On the other end are 7, 8, and 9 type cap rate properties and those properties are pretty much staying where they're at when and if you can get the financing to acquire them.

Okay. And finally, just looking at the second half of the year, you said in three of the last four years the second half has been very weak and you've lost occupancy. Why is there that seasonality?

I think that we've been struggling with that question for each of those years. It's just basically been a reduction in applications in our rental program the second half of each of those years. '05 we broke through it and we had some positive gain. '04 and '03 and '06 we didn't. We are cautiously optimistic that our focus as we've discussed in our previous phone calls is to be busting that pattern in the second half of this year. We have implemented a number of programs and that's been our entire focus along with developing a new home sales program this year. So cautiously we set our budget as I said similar to 2006 with no unrealistic expectations but optimistically I'd like to think that all our efforts will benefit occupancy the second half of this year.

John Stewart, Credit Suisse.

Gary, you referenced the site-built market not really being available to borrowers today. Could you kind of walk us through the economics for buying one of your homes? What is it that makes that value proposition work for a manufactured home buyer?

Well, I think that the differentiation between let's call it a $65,000 manufactured home plus a $350 rent versus a $175,000 home by a Pulte or a Centex or any other local builder that had really been causing a lot of competition, because our credit buyer was able to move to site-built homes, get a first mortgage of 75, 80% and then virtually get a second mortgage, nonconforming mortgage, of the balance either 20, 25%. So they virtually could get into that home with no downpayment or very limited downpayment and in many cases it was a variable rate. As we've all heard, those are now up for refinancing or they're being reindexed. And obviously that's the turbulence that's been created in the subprime existing market but what it does for us in the way it makes us competitive is that that buyer can no longer go to that home. It's not an option for them because they can't bridge the gap on their own between the 75% loan and the 20 or 25% downpayment.

So now one of their only alternatives or a only alternative for them is to come back to a manufactured home and that price of $65,000, come up with a 5 or 10% downpayment and be able to perhaps structure a loan where we'll have a discounted rent for the first couple of years. It's a very appealing option to them financially. And then we're kind of taking it a step further and we are redesigning this home that we spoke of and now is very similar to this $170,000 home, only it doesn't have the garage and it doesn't have the basement. But virtually when you walk into it and you see nine foot flat drywall ceilings and all the other features, there's kind of a wow factor that didn't exist in the down and dirty manufactured and mobile homes of the last 10 years. So I think that that's the competitive factor from an anesthetic point of view. Economically it's just a $65,000 to the $175,000 once you strip out the home rent and the fact that they have very limited taxes, usually more in the form of personal property. And when we get into Michigan, the taxes in fact are about $36 in total a year for them as compared to the site-built homes.

Okay. You kind of referenced some of the programs that you have put in place to offset the weakness in the second half. Can you give us a bit more color? And also, should we expect any impact to G&A from these programs in the second half?

No, because they've been implemented and geared from the beginning of the year. And trying to spare you too much of the mundane operational issues, it's what we call our Performance Evaluation Program or a PEP program. We've more or less set up a computerized report card that everybody sees every day tracking to how they have to be every week, week by week with applications, with conversions of those applications. It's tied to leasing. It's tied to selling homes.

It's really eight key metrics that are measured when they turn their computer on in the office in the morning, the scoreboard comes up and they're tied directly to bonus compensation. So they can see at any given week how they're tracking for budget for the week, for the month, for the year. They can also see how they are tracking on their bonus program. There's a bonus program that rewards them monthly, quarterly and annually. It is in our budget so there is no anticipation that barring any unbelievable turnaround that we would be out of budget, but allows them to measure and get up every day and know what they're doing. And then once every month on Monday morning we pick a region and we go from property one to property 12 in that particular region, going over that PEP report card. And it includes most of senior management when they're around and the regional is reporting directly to us. So, it's just a more hands-on, I think more micro-managing report that's boiled down to eight key metrics.

Okay. It looks like you need to do somewhere in the range of $0.61 to $0.64 in the second half to hit your guidance. Can you give us any update on guidance?

Yes, I think we spoke about that as we saw the numbers during the last week. I think that our conclusion is that we are comfortable confirming guidance as it stands right now and we expect to be able to report further on that third quarter. We are on track or slightly ahead of track but cautiously optimistic, again, because of the seasonality we've experienced during the last two quarters.

On track to slightly ahead of track in terms of the high end of the range?

No, to be somewhere within the range.

Okay, and then lastly just with your stock down under $26 today, can you comment on the buyback authorization and what your thoughts are about [repurchase] here?

Sure. I think I've heard from individual Board members over the last couple of weeks and I think the Board is anticipating after the earnings call to have a discussion on that very issue. I really don't have anything more to comment other than that meeting and discussion will take place at the Board.

And when might we see an announcement?

That would be up to the Board.

Ben Lentz, LaSalle Investment Management.

Hey guys, I missed a chunk of the call so I apologize if some of this is a repeat. But how many -- what is the increase in occupied sites in your guidance for '07?

'07 actually has a decrease of approximately 500 MH sites for the year which mirrors 2006 experience.

And that includes their renting portion?

Yes. Yes.

Okay. And what's the -- is there an increase in renters baked in there?

Yes, there's about -- I think it's 750 site increase due to renters.

Okay, so if I take the 500 and subtract out 750 I get the kind of change in owners for the year?

Correct.

Dave Rodgers, RBC Capital Markets.

Hey, Gary, could you talk a little bit more about the Signature Program. In the sense you talked about 20 communities over the next quarter getting these homes, I think. How many homes overall, what total investment are you looking for? What do you think the total penetration could be on your portfolio?

Well, we're talking about roughly three homes at 20 communities. So, 90 homes, I'm going to say average cost of setup $50,000 or so. So what are we talking about? $4.5 million in the initial program.

And the long-term penetration possibility?

I don't want to be overly optimistic but I think that this product will have great appeal and we'd love to think that we could get to one to two homes per month within a six-month period of time in those communities.

Okay. And then in an earlier question you responded and I wanted to make sure I understood your response. I think you said that you were going to be offering 5 to 10% downpayment on that program and discounted rates going in? Or was that not accurate?

No, I think that that was accurate. Third party financing is available depending on credit quality with 5 to 10% downpayment. And we will definitely work with the marketing of that program to initiate or begin to fuel an interest by rent promotions or anything else that we can do to create interest in the product, to create demand for the product. And eventually our goal would be to turn this over to third party retailers because it would not be our first choice to be in the sales business.

Just taking a step back and I guess how we got into this problem in MH five, seven, 10 years ago as well as what we're seeing in the single family market today. A lot of your comments just seemed to ring similar in terms of discounted rent, discounted I guess downpayments as well as higher overall home prices versus your average tenant. What gives you the confidence that you're not going to see the same pressure that we saw to get us into this -- I call it mess -- that we got into with a program that sounds similarly designed with what happened originally?

Sure, I don't think there's any similarities at all between what happened initially. What happened initially was just terrible credit underwriting and an ability to finance homes with no ability to pay back those borrowings. So the difference between that and putting out a quality product that's priced very, very well so that there's a tremendous value proposition opposed to a terrible value proposition, which was drastically overpriced homes that were marked up, that were fraudulently underwritten by dealers, that were accepted by the lenders and created a -- as we refer to it -- a credit bubble inflation is something completely different than what we're trying to accomplish now.

Those were 30 year financed homes with 5% down and not creditworthy people. Now we're talking about 15 year amortizations with a real 5 or 10% down and homes that are marked up very, very low over the invoice. So that in five or seven years or so, if this resident wanted to go and sell their home and move or move to a [spi-cycled] home or whatever the case was, they'll have meaningful principal paid down on these homes. So, I see them the exact opposite. I see them as a cure to what went wrong seven to 10 years ago.

And you'll be qualifying them off the higher later payment not the earlier discounted rent?

That's correct. I think that I wouldn't overemphasize the concept of discounted rent. I mean it's a promotional tool that is used no different in our industry than the multi-family or anything like that. So we use it and we always have used it when we need to use it. And we will certainly -- for me to move three, four, five homes into a stagnant community, to lower the rent by $99 a month for a year or for two years, that's a process we would use and have used in the past. If the demand is there, we'd eliminate it; if it's not, we would continue it.

Okay, thanks. And the last question, with respect to applications I think you said applications were up and you're seeing very good traction there. Can you give us a sense of how far or how much qualified applications are up year-over-year?

I can give you the numbers and then maybe Jeff can answer the second part. Apps to rent have been up 30% so far this year and apps to buy the rental homes have been up 40% this year as compared to the same period last year. And applications to buy new or used homes are up about 13% over last year. As far as the conversion numbers, Jeff, do you --?

Well, I think that the increased number of new and used homes sales that we have speaks; it's 386 this year versus I think it was 231 last year. So it speaks to a lot more closings, a lot more deals turning into real. And as the rental program has continued to grow, that speaks to the conversion of those applications to closings which not only resulted in net growth but also has to replace the 42% of the residents who this year have moved out on average.

Craig Leupold, Green Street Advisors.

Gary, just your last answer or the answer to the question before, I wasn't sure if you were speaking specifically or just sort of in generalities but is $99 a month discount for one to two years, is that sort of the typical discount within the sales program?

That was a generality not meant to reference any program that exists now or existed in the past. We've gone all the way over the years -- we're talking about the incremental sales here. Like I said, to move two or three homes in a particular program in South Bend, Indiana we've had all kinds of various programs. It might be $99, it might be your first six months at half-price. It might be your first and last month free of the year. I mean, those types of programs come and go all the time with the marketplace. I think they're the incremental sites that we're talking about. So I'm not referencing any specific program. And I'm not meaning to suggest that anyone should go in and model any differently than any model that's ever existed historically in the business, because the type of marketing that I'm talking about is the type of marketing that exists.

Okay. And on the signature program, the 20 communities, what was the sort of selection criteria? And can you give us a little more color on sort of where they're located and whether they're predominantly family communities?

Yes, I think it's kind of interesting answer to that. I think they're predominantly located where we felt we could go head-to-head with this site-built product in the $170,000 range that has been kicking our butt for the last seven years. We're now -- every one of those subdivisions and sales in those subs have come to a screeching halt where Beazer and Centex and US Homes and Pulte and others are basically pulling out of the marketplace. And those areas, surprisingly enough, are Michigan, Indiana, Ohio where we've been hardest hit.

So our criteria is to find communities that have had stiff competition from the surrounding site-built homebuilders and to set up shop, so to speak, right in their face. And be able to compete with this new product and have even site-build brokers who can take a resident over to a Centex subdivision that was kicking our butt at $170,000 home, have them walk into that 1,400 square foot home. If they can't get qualified because of subprime lending isn't there for them any more, that broker can then take them over to one of our products. They can theoretically walk in and say, hey, this is amazing. I didn't think these things looked like this. You know, you're telling me I can get in one of these things for $700 a month, $750 a month, with a $6,000 downpayment? It's kind of like, yes, and sign here. So that's been our criteria where we think we can create that kind of interest in traffic. So those communities are generally all in the Midwest and interestingly enough, like I said, they're where we've had our toughest historical competition over the last five to seven years.

Is it more the marketing aspect or is the product that much different? Obviously we've seen tremendous improvements in manufactured home product. Is this a unique home within the marketplace? Or is just more a unique marketing program?

I think it's a combination of the two. I'm not going to say that this product didn't exist before. It's existed off and on for the last 10 years. But the way Brian, our Chief Operating Officer, Brian Fannon and myself and the Ops have looked at it like -- we've seen in the '80s and '90s tremendous differentiation in manufactured housing as it moved into HUD code and new product and wider homes and longer homes. But it's been that way for the last 15 years.

So I think the real change for us is the concept of an eight or nine foot flat ceiling instead of a textured cathedral ceiling, and all the bells and whistles in appliances, drywall, upgraded carpeting, those types of things that are very, very similar to haw this affordable housing is being done by the nationals. So it really does compete favorably aesthetically. And then additionally, we have the I think the rebalancing in the potential customer who just -- we're not going after the customer who's been foreclosed on in a site- built home. We're going after the customer who can no longer buy that site-built home because that financing isn't there for them.

So, like I said before, the only alternative for them in this type of home is something along those lines and that's where we're going to market hard to. And I think that we're a little bit encouraged. Again, we're talking about incremental sales -- one, two, three, we'd love to get three in a month in a particular community that's pretty similar to how we historically operated before this last seven or eight years that have been challenging. And as I said, of the four homes that sold, one of them was in Flat Rock, Michigan. One of them was in northern Michigan in Traverse City, and one of them was in -- oh, not too far from Pontiac, Auburn Hills, about 45 minutes from Flint, so in the heart of the automotive country. And all of them, as I said, have been received very, very well.

So we're not saying that we're going to turn the Company on a dime. But I think that we are suggesting strategically as we move, wrap up the rental program, continue to have success and meet our budget on converting the rental homes to sales to third parties, and now introduce this new product as kind of the next step to create new revenue producing sites; as opposed to just keep running and increasing the rents on our existing base of sites, we begin to see a little bit of future for the Company.

You also mentioned that you're sort of tranching your renter base based on whether they made six months or 12 months of payments and then they move into a telemarketing program. Now that you're in contact more directly with those renters and trying to push them into homeownership or offering them programs to enter homeownership, do you get any sense as to how many of those are interested in being homeowners at some point versus those that, as you alluded to earlier, may just be renters for as long as they're around?

Yes. We do have that sense and I think that we can provide that information. And again, [John McLaren] is someone you could contact within the Company for that information. And again, we're somewhat really just beginning to crack the surface. I mean the dialog that's going around here is programs running ahead of budget. It's working out very good. It's performing so far credit-wise up to our expectations. So we need more telemarketers or we need to beef up that program a little bit as we look into 2008 and look to go from selling 320 homes in budget this year to perhaps 520 next year.

One last question on kind of Midwest from a fundamental standpoint we've seen some of the apartment owners in the market posting surprisingly good results. Can you talk sort of generally about Midwest fundamentals and what you're seeing there? And then also any comments on sort of valuation or changing cap rates of those types of communities given what transpired in the debt market?

Yes, I think my comment would be that the deterioration has stopped, okay, at the rate within which we were losing sites. And then, as we've discussed, the repos are at a level of 233 in our entire portfolio. And I think that everybody is marketing strong and people are looking for more affordable means to put a roof over their head. Whether that be the apartment multifamily, whether that be manufactured housing, I think we're all looking at it as an opportunity to market to the resident who no longer can buy the site-built home; can no longer afford to be in the site-built home. And I think that multifamily has reflected that and I think that our occupancies have kind of reflected kind of a bottoming out, if you will, in the Rust Belt.

I think we're all cautiously watching what's going on with the automotive world and I don't have any single thing that I can specifically point to. On the cap rate think I had spoke earlier. You see fluctuation basically from cap rates that are roughly six caps for the institutional quality properties, age restricted retirement Sun Belt properties to roughly, I'd call it an 8.5, 9 cap rate in the all-age roughest communities that are [ahead], that might be our communities that have the most amount of rentals in them.

I don't see much change in that happening, but the change that I referred to earlier is I don't see anyone going more aggressive than that because of what's happening with the debt marketplace. And because people are looking at cap rates and saying are these cap rates going to hold up long-term? And obviously a lot of talk about any NAVs and valuations and things like that.

Steven Rodriguez.

Given that you're expecting a negative 595 site decrease in the second half, I was wondering if you give us an idea of what your thoughts were on that regarding what you've seen on the first five weeks in the third quarter?

Sure. I don't think we could comment too much other than what's been publicly released to date, which would be through second quarter. But I think that just to reiterate, we are slightly ahead of budget on all aspects and levels of the operations of the Company. We've got a stronger than ever policy and procedure in place that we think can help to improve the seasonality and losses the second half. But we could not go out and state that we're going to for certain have any clarity into the future of what is or isn't going to happen third and fourth quarter. I think that historically so everyone know -- and Jeff, you can correct me -- were we really most hit third quarter last year?

Third quarter was, well, actually they were both pretty tough. It was pretty evenly balanced in the last half, the bad news.

Okay, so what I was going to suggest, I think third quarter will be a good reflection of how we think the year will end up. And without knowing how that is going to shake out over the next three months, there's no forecast that I could give.

Okay, and my last question is could you give us your thoughts around the sustainability of the dividend, given that year-to-date your operating FAD -- or your reported FAD is operating below dividend?

Well, actually our FAD is -- our dividend is 98% of our FAD if you take our FFO and subtract our recurring CapEx as reported in the supplemental data package.

So it's just below --

We're running 98% at this point in time. So -- or to put it differently, I suppose you could say that FAD is 102% of the distributions.

And your expectations for year end? Pretty much flat?

Well, the second half is usually -- last year we earned $1.20 in the second half. This year we'd like to -- the target would be to earn about a $1.26 or thereabout, which would get us to [$2.70] which is in the middle of our guidance. So we would expect to do a little better. And then we haven't -- this FAD, I mean there's also fairly significant which provides a little additional cushion to the dividend. So, at this point in time it's covered and we'll just kind of see how the next couple of quarters go.

Great. Thank you.

(OPERATOR INSTRUCTIONS) It appears there are no further questions in the queue. I'd like to turn the call back to management for any concluding remarks.

Just once again, we'd like to thank you all again for participating on the call. Management is pleased with progress to date and we look forward to our third quarter call with everybody.

Thank you.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.